The Japanese Economic System under the Global Crisis: Change and Continuity

1. The Japanese Economic System under the Global Crisis: Change and Continuity September 2009 Vietnam Satoshi Mizobata KIER, Kyoto University

2. Introduction • The Global crisis hit Japan. • Economic recession in economy • Change and continuity of the economic system：LME vs. CME • Political change • Lessons of the Japanese experiences

3. Controversy on Japanese Heterogeneous Economy Traditional controversy (1930s) Backwardness vs capitalist stage Modern controversy Japan as NO.1 vs Backwardness Is your country heterogeneous or the normal European country?

4. The catch-up (flying geese) model in East Asia Graduation NIEs Japan ASEAN China Vietnam Laos, Cambodia Myanmar Authoritarian Regime for development

5. General Election in August 2009: from the Liberal-democratic party to the Democratic party

6. General election in August 2009

7. 【position of party】 Globalisation Westernisation Democratic party of Japan Socio-democratic State intervention regulation Komei (central) Liberal market stabilisation liberalisation privatisation Liberal democratic party Communist part Nationalism

8. The Democratic Party won in August 2009. This is the first time of “transition”.

9. 1. Japanese economy after the ‘Lost 10 years’ Initial conditions (negative inheritance of the bubble economy) of the contemporary Japanese economy

10. Changes of the economic policies in the post-war period Economic growth 40 years in Japan High economic growth in 1960-1973 (Average Economic Growth: 9.7%) Income doubling policy - An increase of production - an increase of wages - an increase of consumption ---- virtuous circle 1958-1962 (42 months) boom 1 called "Iwato Keiki" 1965-1971 (57 months) boom 2 called "Izanagi Keiki" 1973 Oct.: the first oil shock Stable economic growth in 1973-1985 (Average Economic Growth: 3.3%) 1979 Jan.: the second oil shock Bubble economy in 1985-1991 (Average Economic Growth: 4.9%) the highest stock price in 1999 Dec. Lost ten years in 1991-2001 and now (Average Economic Growth: 1.1%)

11. GDP in Japan

12. Bubble economy, what? Bubble economy after 1985 G5 Plaza accord (strong Yen and financial relaxation) and a decline of petroleum price (positive current balance) changed the economic environment and lead Japan Bubble economy. 1) liberalization 2) An increase of assets value 3) Anticipation of high assets prices 4) Financial flows support the assets price increase. Oversupply of domestic money → investment in estate markets (advantageous tax also stimulated) → increase of land price → increase of stock price → expansion of banks’ financing ability → increase of land buying by the banks’ credit → increase of land price →…

13. Bubble economy High land price High stock price High leverage ratio Economic boom-bubble economy

14. Collapse of the bubble economy-lost ten years Economic policy in the period of the post-bubble economy: 1990s overkill of restrictive policy 1990s is called "lost ten years" in Japan, because during this decade the long-term recession has hit Japan. This drop down is a product of the so-called Bubble economy on the one hand. On the other hand, the traditional Japanese economic system is regarded as a negative factor, because it has revealed its inefficiency and opaqueness. Budget deficit Bad loan

15. Change in bubble economy

16. Negative legacy in lost ten years 1) Public finance: deficits • A decrease of tax revenue • An increase of expenditure • Accumulated deficits worst No1 in G7

17. Negative legacy in lost ten years 2) Bad loans • Opposite phenomenon of the bubble economy • Bankruptcy of banks and nationalisation • The long way of settlement of bad loans

18. Bad loans debate: 1) Disposal of bad loans brings about the new bad loans. 2) Without disposal of bad loan, the economy cannot grow. New bad loans after 1997/98 Additional bad loans Bad loans under bubble economy

19. Liabilities of Non-financial company in Japan(stocks, 2000, Y trillion,%)

20. Economic indicators

21. Economic indicators

22. Public investment (Y. 27.4 trill. during 1992-1994, Y. 22.6 trill. during 1998-1999): The real expenditure was less than its plan, and the contribution to the economic growth is small or negative (1999).A multiplier effect of public investment was decreasing. The Japan bank changed its financial policy form tight to relaxation in 1991. However, the bank could not stop deflation. In 1999 February, the bank adopted zero-interest rate policy. Moreover, the bank adopted quantitative relaxation policy and increased current account for interbank transaction. However, the practical money supply was restricted, the government failed to go out deflation spiral. In addition, the stop-and –go policy of the central bank weakened the effectiveness of zero-interest rate policy. Anti-deflation economic policy

23. Economic recovery:2002-2006 • The longest and weak growth • The corporate profits lead the growth. • Japanese economy changed its structure: heavy export-oriented economy • Growth concentration in 5 main branches: automobile, electric machine and others • Sensitivity to the global economy

24. Izanagi boom Bubble boom Largest boom Nov.65-July 70 Dec. 86-Feb. 91 Feb. 2002-Oct. 07 Length of boom 57months 51months 69months Real economic annual growth 11.5% 5.4% 2.1% Nominal annual rate 18.4% 7.3% 0.8% Growth rate in the growing period 122.8% 34.7% 4.2% An increase of wage 114.8% 31.8% -1.6% An increase of consumer price 27.4%(5.1) 8.5%(2.0) 0.7%(0.1) An increase of Nikkei stock price 71.7% 44.1% 67.9% Change of working population +3510 thousand +4130 thousand -650 thousand Comparison of booms in Japan

25. Export dependence of Japan(%) Export/nominal GDP

26. Main export goods(\ trillion)

27. Main export direction(\ trillion)

28. 2. The global crisis in Japan The cheap money caused the serious crisis in the world. The global crisis hit Japan. It is difficult for Japan to escape from the vicious circle (deflation).

29. 21st century crisis • failure of market and failure of government • 21st century financial crisis: 1) private short term fund (Hedge Fund), 2) a decrease of IMF function, 3) fragile financial system and drastic de-regulation, 4) firm’s dependence on indirect financing and foreign capital • traditional cyclical crisis

30. The spread path of the crisis

31. Crisis hit Japan • A decline of stock price • Economic panic: decline of GDP and export, decline of balance (Heavy dependence of export) • Decline of employment and income -decline of consumption (demand) and export -decline of production : vicious circle and deflation spiral

34. GDP (growth rate, annually : %)

35. Investment (growth rate, annually : %)

36. Indexes of Business Conditions

37. Consumer price index

38. Trade balance of Japan(\ billion)

39. Foreign trade shock of crisis(balance: \ billion)

40. Decline in employment • Cut of irregular employees: 216 thousand laid off • A decline of regular employees • Increase of unemployment rate • Instable safety-nets →political complain and transition (DPJ won in the general election of 2009 August)

41. Total employment index

42. Unemployment rate

43. Unemployment (%)

44. 3. Is the recent recovery real? The recent economic recovery showed a recovery of export industry. However, the perspective of the recovery is opaque.

45. Recovery of developed economy, Japan • An increase of stock price • An increase of automobile sales • Export increases • Improved consumer confidence

46. Economy recovered?

47. Perception of business conditions(big enterprises, good-bad %)

48. Recovery is not real. • Severe labour market • Economic gaps in recovery • Survival of vicious circle: cost cut-income and investment decline-demand decreases-production decreases-employment decreases….. • Unclear global recovery and protectionist measures

49. A Job offers-to-seekers ratio(January of each year)

50. A Job offers-to-seekers ratio by prefecture (ratio, difference)